1. Field of the Invention
This invention relates generally to risk assessment, and more particularly to systems and methods of evaluating risks associated with financial transactions.
2. Description of the Related Art
Most financial transactions involve a customer making a payment in exchange for goods or services from a merchant. Many times the payment is in a promissory form that instructs the customer's bank to pay the merchant. A check is one example of such promissory form of payment. As is well known the funds promised by the check are sometimes not paid due to reasons such as insufficient funds in the customers' checking accounts or fraud. Thus, the merchant is taking a risk whenever a check is received as a payment. Many merchants maintain local databases that include, for example, a list of checkwriters that have written bad checks in the past. Such databases may range from a simple list on paper for a small store owner to a computer network for a chain store. As is known in the art, managing such databases requires use of merchants' resources that could otherwise be used more beneficially.
In order to manage financial transaction risks, many merchants subscribe to an agency that assesses risks associated with financial transactions. For a given transaction, a subscribed merchant sends a transaction approval request to the agency with information such as check amount, check identifying information, and information about the checkwriter. The agency assesses the risk and generates a risk score based on the information received. The agency then either authorizes or declines the transaction based on the risk score. Some examples of these risk assessment agencies include TeleCheck and Equifax. The level of subscription to such an agency can vary, from an approval service to the agency assuming the risk of the transaction by either guaranteeing the check or purchasing the check from the merchant. Thus it is in the interest of the agency to accurately assess the transaction risks.
In order to assess a transaction risk, check approval agency typically calculates a risk score by inputting information about the check, checkwriter, and the merchant into one or more algorithms. The algorithms then return the risk score that is indicative of the transaction risk. Traditional check approving process typically comprises a cutoff risk score such that a transaction whose risk score is higher than the cutoff risk score is authorized. Conversely, a transaction whose risk score is lower than the cutoff risk score is declined. Such approval process is generally configured to statistically favor the merchant or the check approving agency in terms of probable risk. As a consequence, the cutoff risk score selected causes decline of many check transactions that have borderline risk scores.
Significant portion of the declined transactions, however, are beneficial to both the merchant and the check approving agency. As an example, a checkwriter whose check “bounces” occasionally due to careless bookkeeping, but always ends up paying for the bounced check plus a substantial fee, is ultimately beneficial to the merchant or the agency; however, the bounced check history will most likely reflect negatively and may lead to a decline decision by the agency. Traditional risk assessments performed by check approval agencies are not able to evaluate such specific situations very well, and thus do not benefit as much from such potentially beneficial transactions.
Hence, there is a need for improved and more precise scoring methods for determining whether to authorize or decline checks written by customers. To this end, there is a need for a system and method that is better able to distinguish between a high risk transaction wherein the checkwriter will most likely be unable or unwilling to cover the check and a medium risk transaction wherein the checkwriter will, in all likelihood, be able to cover the check at a later time plus pay the additional service fees.